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Transcript of THE POLITICAL ECONOMY OF THE MALAYSIAN · PDF fileTHE POLITICAL ECONOMY OF THE MALAYSIAN...

THE POLITICAL ECONOMY OF THE MALAYSIAN SUBNATIONAL GOVERNMENTS FISCAL

BEHAVIOR

AHMAD ZAFARULLAH ABDUL JALILCollege of Arts and SciencesUniversiti Utara Malaysia

ABSTRACT

This article att empts to shed light on the political economy of the Malaysian state governments budgetary behaviour by tailoring hypotheses drawn from recent theoretical literature to the Malaysian institutional context and testing them empirically. The main objective here was to examine whether state governments fi scal behaviour can partly be explained by the political att ributes and the institutional characteristics of the government, and of the legislature. In particular, the study analysed whether the incentives for the state governments to observe a prudent spending behaviour have not been undermined by the fact that they have been able to infl uence relevant central government decisions regarding their fi nance. The estimation results showed that states that are over-represented at the executive level tend to have higher spending and defi cits. However, no correlation was found between over-representation at the parliament and state governments fi scal outcomes. This can be explained by the fact that in Malaysia, as is frequently the case in developing nations, the legislature is peripheral to the executive in terms of decision-making power.

Keywords: State governments; fi scal behaviour; political economy.

ABSTRAK

Artikel ini membincangkan gelagat fi skal kerajaan negeri di Malaysia dari sudut politik ekonomi. Berdasarkan kepada teori ekonomi politik, penulis cuba untuk menganalisa secara empirikal situasi di Malaysia. Objektif utama artikel ini adalah untuk melihat sejauh mana gelagat fi skal kerajaan negeri di Malaysia dipengaruh oleh atribut politik serta karakteristik institusi kerajaan dan legislatur. Secara lebih khususnya, penulis cuba melihat keupayaan kerajaan negeri untuk mempengaruhi keputusan yang dibuat oleh kerajaan persekutuan dan sejauh mana ianya akan mempengaruhi gelagat fi skal kerajaan negeri. Hasil dapatan kajian menunjukkan negeri yang mempunyai wakil yang

MS 16 (1), 261-283 (2009)

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ramai di Kabinet akan mempunyai tingkat perbelanjaan dan defi sit yang lebih tinggi. Walau bagaimanapun, penulis tidak menemui sebarang hubungan yang signifi kan di antara perbelanjaan dan jumlah wakil di Parlimen. Penulis merasakan ini sama seperti kebanyakkan negara-negara membangun yang lain, kuasa membuat keputusan di peringkat kerajaan persekutuan lebih tertumpu di pihak kabinet.

Kata kunci: Kerajaan negeri; gelagat fi skal; ekonomi politik.

INTRODUCTION

The fi rst generation of economic theories of fi scal federalism generated much optimism about decentralisation in the form of bett er improvement in effi ciency, accountability, and governance. However, these theories seemed to be increasingly anachronistic in the face of subnational debt accumulation and bailouts, as well as evidence of corruption and ineffi ciency associated with decentralisation. According to Rodden (2005), the failure of the prevailing literature to describe the reality of decentralisation is due notably to the absence of the political dimension in its analysis. As a result, a new wave of scholarship where political variables are given centre stage has emerged (Bellefl amme & Hindriks, 2003; Besley & Coate, 2003; Bordignon, Cerniglia, & Revelli, 2004; Hindriks & Lockwood, 2005; Persson & Tabellini, 2000). A major assumption underlying the new political economy literature is that politicians are primarily interested in maintaining and enhancing their political careers. Most importantly, in these models, government decisions are viewed as bargains struck among self-interested politicians att empting to form winning coalitions, rather than refl ections on the optimal provision of collective goods or the internalisation of externalities. Consequently, the central government is no longer autonomously able to alter subnational policies as it will have to bargain with subnational governments in order to gain support from all or at least some minimum fraction of them.

This paper highlights the political economy of the Malaysian state governments budgetary behaviour by tailoring hypotheses drawn from recent theory literature to the Malaysian institutional context and testing them empirically. The main objective here is to examine whether state governments fi scal behaviour can partly be explained by the political att ributes and the institutional characteristics of the government and of the legislature. In particular, it was analysed whether the incentives for the state governments to observe a prudent spending behaviour have not

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MS 16 (1), 261-283 (2009) 263

been undermined due to the fact that they have been able to infl uence relevant central government decisions regarding their fi nance. There are basically two hypotheses that was tested in this study: Do states with the most votes (or the strongest representation) in parliament or in the government have relatively higher spending and run a larger defi cit? And do states that share the same ideological leaning as the central government have relatively higher spending and run a larger defi cit? The reason being, a highly infl uential state in the sense that they are highly represented in the government or share the same political ideology as the central government, face weaker incentives to be fi scally responsible as it has higher probability of obtaining extra allocations from the central government and in case of a crisis, is more likely to be rescued.

The paper is organised as follows. The second section provides a more detailed discussion on the links between political factors and economics, as well as fi scal outcomes at the subnational level by reviewing the work that had been done both by economists and political scientist in this area. Section 3 discusses the econometric approach that was adopted. The results of the estimations is presented and discussed in section 4 and fi nally, section 5 concludes.

A REVIEW OF LITERATURE

In many countries (and in particular federal countries), the structure of the central government includes representation of the subnational units. Theoretical as well as empirical studies pointed to the fact that central government decisions, especially those that concern the interests of subnational units, will be subject to the infl uences of this representation both at the legislative and executive levels. Nevertheless, researchers tend to privilege the former as the main arena where self-interested politicians strike bargains among themselves. This focus on the legislature has given rise to the term legislative bargaining which is usually used in complement to other terms such as logrolling or pork-barrel1. Indeed, representatives of the states or regions at the legislature will engage in a bargaining process among themselves which will usually end up with some of them logrolling their votes in order to achieve passage of pork-barrel projects.

Decision-making concerning distributive policies2 constitutes a good example of legislative bargaining at work. By defi nition, distributive politics is a political decision that concentrates benefi ts in a specifi c

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geographic district or region, and fi nances expenditure through generalised taxation3. The fact that these policies are distributive in nature implies that with the majority rule, there will be no voting equilibrium and Condorcet cycles will unavoidably emerge. There are mainly two views regarding the legislative passing of redistributive policies the minimum winning coalitions and the universal and oversized coalitions. Another strand in the literature of distributive politics consists in testing the Law of 1/n proposed by Weingast, Shepsle, and Johnsen (1981), according to whom the level of distributive spending is positively linked with the number of legislators (Balla, Lawrence, Maltzman, & Sigelman, 2002; Huriochi & Lee, 2004; Milesi-Ferett i, Perott i, & Rostagno, 2001; Rodden & Arretche, 2004). The mechanism at work according to the authors is the common pool problem: since each group fully benefi ts from its specifi c spending programme but the burden of taxation is diff used, the cost of public expenditures is not fully internalised by the political decision-makers and thus could lead to greater-than-optimal public expenditures.

The legislature is not the sole channel through which subnational units can exert its infl uences on the central governments decision-making. In Canada for instance, regions do not have any formal legislative representation. However, it does not prevent some regions from obtaining special treatment from the federal government. For example, in 2004, Ontario was awarded a grant of CAD 5.75 billion in response to Premier McGuintys cry that Ontario was paying more than its fair share into the federation. Nevertheless, no such deal was struck, or even discussed with Alberta, where the per capita fi scal transfer was higher than in Ontario.

Cox and McCubbins (1986) presented a model where electoral candidates compete by promising direct redistribution of welfare among the various groups in their constituency. The central insight of the model is that the type of coalition the candidates att empt to build (thus the nature of their distributive politics) will depend on their att itudes toward risk. They showed that risk-averse incumbents tend to invest most heavily in